ERISA Fidelity Bond Requirements

ERISA fidelity bonds serve as a form of protection for certain ERISA plans.

The Employee Retirement Income Security Act (ERISA) of 1974, as amended, is a federal statute that establishes guidelines for retirement plans. This statute is jointly overseen by the Department Of Labor and the Internal Revenue Service. Retirement plans must meet the minimum guidelines set forth in ERISA to receive preferential tax treatment for both employers and employees alike.

What Is a Fidelity Bond?

A fidelity bond is a bond that provides insurance to an ERISA plan in the event of fraud or dishonesty. The fidelity bond serves to protect the plan from losing any valuable plan assets if the people that handle the plan's assets prove to be dishonest. ERISA does not require fiduciary liability insurance, but common practice for retirement plans is to have such a policy in addition to a fidelity bond, which is required. Fiduciary liability insurance insures the plan from loss stemming from the actions of one of its fiduciaries.

What Does it Mean to Handle Plan Assets?

Individuals who handle plan assets include those who physically work with the plan assets, but their role can also be more broadly applied. Individuals are deemed to handle funds if their job duties put them in a position where there is a risk that any plan assets could be lost as a result of fraud or dishonesty by that specific person. This rule applies whether the individual could act independently or with others. ERISA regulations provide that the following categories are a nonexclusive list of activities that would be considered handling plan assets: physical contact, ability to transfer plan assets from the plan, disbursing authority, check-signing authority and decision-making authority over other activities requiring bonding.

What Is the ERISA Fidelity Bond Requirement?

Section 412 of ERISA requires that certain plans have a fidelity bond that covers all individuals, including fiduciaries that handle plan assets. The fidelity bond must be equal to at least 10 percent of the value of the assets that are handled. The maximum fidelity bond is $500,000. If a plan's assets are invested in the sponsoring employer's securities, then the maximum fidelity bond is increased to $1,000,000. There must not be a deductible associated with the fidelity bond. The fidelity bond must be in the plan's name as opposed to the employer's.

Which Plans Must Obtain a Fidelity Bond?

Not all ERISA retirement plans are required to have a fidelity bond. Section 412 applies only to those plans that are completely unfunded or not subject to the coverage of ERISA Title I, which is overseen by the Department Of Labor. Title I of ERISA sets forth rules relating to participant disclosures, funding and vesting, among other things.

References

• Internal Revenue Service: EP Examination Process Guide -- Section 2 -- Compliance Monitoring Procedures ----Top Ten Issues -- Defined Benefit Plans
• U.S. Department Of Labor: Employee Benefits Security Administration issues guidance on fidelity bonding for employee benefit plans
• U.S. Department Of Labor: Field Assistance Bulletin 2008-04